An Investment Trust is a company that has been set up to invest in the shares of other companies. By buying shares in the investment company, the investor is in effect spreading the risk that would normally by associated with a single share investment because the value of the Investment Company's shares are directly related to the spread of investments it is making.
The share price of the Investment trust should be the value of the underlying holdings called the Net Asset Value (NAV) but the share price can often be trading at a discount (or premium) to the NAV.
As a company, Investment Trusts have the ability to borrow money which can then be used to buy further investments, this being known as gearing. Whilst this can have the positive effect of boosting returns if investments perform well, losses can be exaggerated if the investments perform poorly.
From a tax perspective investing in an investment trust is treated the same as investing in shares.
SOME FUNDS WILL CARRY GREATER RISKS IN RETURN FOR HIGHER POTENTIAL REWARDS. INVESTMENT IN SMALLER COMPANY FUNDS CAN INVOLVE GREATER RISK THAN IS CUSTOMARILY ASSOCIATED WITH FUNDS INVESTING IN LARGER, MORE ESTABLISHED COMPANIES. ABOVE AVERAGE PRICE MOVEMENTS CAN BE EXPECTED AND THE VALUE OF THESE FUNDS MAY CHANGE SUDDENLY.
SHARES IN SMALLER COMPANIES AND EMERGING MARKETS ARE GENERALLY TRADED LESS FREQUENTLY THAN THOSE IN LARGER COMPANIES AND ESTABLISHED MARKETS. THIS MEANS THAT THERE MAY BE DIFFICULTY IN BOTH BUYING AND SELLING SHARES AND INDIVIDUAL SHARE PRICES MAY BE SUBJECT TO SHORT-TERM PRICE FLUCTUATIONS.